For a number of landowners in the state, oil and gas royalties have become a hot topic over the last few years. First with the Haynesville Shale and now with the Brown Dense and Tuscaloosa plays, oil and gas activity is high and more landowners are having the opportunity to receive revenue from oil and gas production.
UNDERSTANDING OIL & GAS ROYALTIES
Since mineral interests are commonly tied with the land, a frequent question for landowners is how to best manage their mineral assets, particularly when there is oil and gas production in the area. In managing minerals, the biggest questions usually revolve around the production payments, or royalty checks.
The royalty checks received by mineral owners are payments for their share of the oil and gas production from one or more wells that are located in a production unit that includes landowner’s minerals. Each company is required to provide the backup data for the amount that they are paying. However, this data is basically written in code and many times can be confusing – even to the experts.
Even though sifting through royalty check details can be a chore, it is important to know that what you are being paid is accurate. When reviewing a royalty check, there are a few key things to look for:
- Royalty interest – the royalty interest is the percentage calculation used to pay the royalty owner. It is based on the royalty owner’s property in the unit, the unit size, and the royalty interest that was included in the lease. Typically the oil and gas company will send out the royalty interest in a statement to the owner prior to sending any royalty checks. The statement is referred to as a “division order.”
- Deductions – historically, most leases signed by mineral owners allow oil and gas companies to deduct certain costs from royalty owners’ payments. These are costs that are associated with selling the oil or gas that is produced from wells. However, many newer leases include clauses that prohibit certain or all deductions from royalty checks.
- Severance Tax – severance tax is levied on all production of natural resources in Louisiana. However, there are several exceptions for certain oil and gas wells that qualify for the Severance Tax Relief Program. A horizontal well is one type that qualifies for the program – which includes most of the Haynesville Shale wells in addition to the wells that are planned for the Brown Dense and Tuscaloosa plays. In order for these wells to be accepted into the program, the operator of the well is required to fill out applications for each qualifying well and submit the application to the state. If accepted into the program, production from the qualifying wells will be exempt from severance tax for two years, or until the well reaches “payout.” With the increase in horizontal drilling, it has become a major task to keep up with activity involving the Severance Tax Relief Program. It is important for mineral owners to review their royalty checks to verify that any severance tax deductions are reimbursed for wells that are accepted into the program.
On the majority of royalty checks, all the information will be accurate. Oil and gas companies invest significant resources to ensure that they are paying royalty owners their fair share. However, as long as people are involved – there will be errors that slip through the cracks.
If a royalty owner finds an error on their check, the first course of action is to contact the company in writing. Many times, the error can be addressed and corrected quickly by the operator’s owner relations department. However, there are times when the payment issues are more complex and require additional action or research. At that time, the royalty owner should contact a professional that is familiar with oil and gas issues and how to resolve them – this would typically be an oil and gas attorney, mineral manager, or other related professional. Knowing the right way to resolve royalty payment issues can translate into a significant difference in the timeliness and amount of the resolution.
A preemptive way for royalty owners to help resolve payment issues is to learn more about the oil and gas industry and activity in the area. In Louisiana, the Department of Natural Resources maintains a website that can be a great resource for land and mineral owners, www.sonris.com. SONRIS provides an enormous amount of oil and gas information, including well records, drilling permit applications, and maps. Learning to navigate and use SONRIS can help land owners become much more knowledgeable in dealing with oil and gas companies.
Continuing to learn about mineral assets and making sure that they are managed properly are the keys to maximizing the value of your minerals. Royalties can be a tremendous blessing, but not understanding or not investing the resources to review the royalty payments can cause owners to miss out on the total value of those assets.
(Jeremy Pendergrass serves as President of Argent Property Services, a mineral management company headquartered in Ruston, Louisiana. Contact him at firstname.lastname@example.org or 318.251.5813.)